Verizon’s Got Mail: TeleCom Giant & AOL Agree To $4.4B Deal

AOL Time Warner didn’t work. But how about AOL Verizon? The online company’s shares are up more than 18% in pre-market trading — and Verizon’s down about 1% — after the announcement of the $4.4 billion deal that could advance the telco’s online video aspirations.

AOL’s properties include The Huffington Post, TechCrunch, Engadget, and AOL.com. Its CEO, Tim Armstrong, will continue to run the operation if the deal closes. No word yet on whether Verizon or AOL would have to pay a break-up fee if the acquisition, which the companies expect to wrap up this summer, falls apart.

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Armstrong calls Verizon “a leader in mobile and [streaming] connected platforms, and the combination of Verizon and AOL creates a unique and scaled mobile and [streaming] media platform for creators, consumers and advertisers.”

Verizon’s offering $50 for each AOL share, a 15.8% premium over yesterday’s closing price. But the online company’s up to $50.30 pre-market, which suggests that some believe that someone else might enter the picture.

Verizon’s had a rocky ride in its effort to become a video power — a key part of its growth plan as its wireline phone business continues to erode. It has about 5.7 million customers for its cable-like FiOS systems, but has stopped expanding to additional markets.

While its biggest competitor, AT&T, prepares to buy DirecTV, Verizon is focusing on Internet-delivered video, especially content that can be transmitted over its industry-leading wireless network. A streaming joint venture with DVD kiosk company Redbox fizzled out.

Early last year Verizon bought Intel’s OnCue streaming technology. Later McAdam said that by mid-2015 he expected to offer mobile users a “bundle with major broadcast providers” plus a collection of “custom channels.” It has made deals with several content providers, including the NFL and DreamWorks Animation’s AwesomenessTV.

But last month FiOS picked a fight with Disney and other powerful programmers by introducing a basic pay TV bundle that didn’t include mainstays including ESPN. (The sports channel sued for breach of contract, a claim that Verizon rejects.)

“We still can’t figure out what Verizon’s end game is here,” MoffettNathanson Research’s Craig Moffett said. “For one, given their interest in launching their own [streaming] service later this year, we are not sure what is gained from going to war with their largest content providers. Perhaps the battle with Disney et al. is a strategy to gain the political advantage in D.C. and set the stage for regulatory review over carriage agreements.”

AOL opens a different path for Verizon. At its recent NewFront presentation to advertisers, the online company reiterated its commitment to “premium content, widely distributed and monetized on a scaled global platform.” It has increased its video content production by about 45% over the last year. Armstrong told analysts last week that about 60% of AOL’s users access its content via a mobile device.

But AOL’s most important contribution to Verizon may be its advertising technology: The AOL chief has been the industry’s leading evangelist for programmatic ad buying — the industry term for a process where ad inventory can be quickly auctioned by computers programmed with the buyer and seller’s requirements. AOL’s programmatic sales grew 80% in Q1 and accounted for 45% of AOL’s non-search ad revenue.